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Adaptation From Flash Boys Offers Inside Look at High-Frequency Trading
Lasrick (2629253) writes "This NYT adaptation from the book provides an in-depth and infuriating look at how the stock market is rigged. Brad Katsuyama of the Royal Bank of Canada couldn't understand why stock he was trying to buy would suddenly vanish: 'Before RBC acquired this supposed state-of-the-art electronic-trading firm, Katsuyama's computers worked as he expected them to. Suddenly they didn't. It used to be that when his trading screens showed 10,000 shares of Intel offered at $22 a share, it meant that he could buy 10,000 shares of Intel for $22 a share. He had only to push a button. By the spring of 2007, however, when he pushed the button to complete a trade, the offers would vanish.' The ensuing investigation by Katsuyama led him to design a program that actually slowed down the trades. But Katsuyama's investigation revealed so much about how the system is rigged."
> how exactly is this rigged for the longer term investor?
It isn't. Long term investors are looking for price changes from 20-200% between trades. HFT is making money in the .1% range which is basically in the noise band.
Even then a reasonably intelligent investor has some tools he can use to protect himself from the worst front running - pay attention to the spreads and use limit orders.
Nobody trades like this, and nobody traded like this in the early 2000s. That trading style has been obsolete for 20 years, and predates HFT. You don't see something, decide you want that, and then hit Enter or click your mouse button.
In this example, you decide the maximum price you want to pay in advance, and you enter a limit order. If you're selling you decide upon your minimum selling price, and in the same way you enter a limit order. You've locked in your profit, regardless of timing.
If you're setting up some sort of combination, you enter the triggering parameters in advance, and you don't even need to see what was being done on screen.
People say that computers are trading with each other. That is false. That's like saying that Microsoft Word writes documents. Trading companies, their traders, and their programmers write trading software and adjust parameters. 30 years ago, the "software" was held in the traders' minds, and the execution was done via outcry. The underlying mathematics is the same, and traders don't have to hold these calculations in their minds.
The problem here is this. Extremely rich companies can have the fastest links to the exchanges, but this is no different from the olden days where the oldest and richest companies had the smartest and most well-connected traders. The tools of the trade are slightly different, but rich and successful companies will leverage their money to be the most successful, or else they will be replaced by somebody else.
My own background is that I wrote a derivative trading system between 1999-2006 for a tiny company that ultimately didn't make it because we couldn't compete against the big boys. This angst about HFT is largely technophobia. The traders trade, they learn the software, and they often don't understand how it works. To programmers like me, the algorithms are a black box, but the traders do understand the mathematics pretty well. When you have traders coming out against HFT, you have traders who couldn't understand the software or were burned because their companies weren't rich enough.
People who have never worked in this field who are against HFT really don't understand computer-based trading very well, from either a programmer's perspective or a trader's perspective. Keep in mind that the job of a computer is to make mundane things happen more quickly, so we can focus on more human things. You want your 401K to execute as accurately-priced trades as possible. HFT ensures that both styles of trading benefit.
If you don't like it, vote for somebody who will increase science spending. Currently, a bright 16 year old has a choice between
Moving virtual little green pieces of paper around: making ridiculous amounts of money
Curing cancer: being poorly paid until hitting middle age, then almost certainly hitting a career dead end and having to retrain to get coffee for someone who moves little green pieces of paper around.